Online gaming seems coronavirus proof, but is it recession proof?

Online entertainment and gaming companies are seeing COVID-19 surges in revenues, but are these businesses in a position to resist the pressures of a global recession?

With many countries around the world entering into recession due to the impact of the coronavirus pandemic, online gaming companies will face challenges like never before. Let’s not forget, this is a segment which did not exist during the last major financial downturn, the ‘Great Recession’ of 2008, and it is almost entirely reliant on discretionary income.

This is of course a massive question which should not be taken at surface value, but the up-coming recession has the potential to completely turn this industry on its head. However, for the moment, there is money to be made thanks to circumstance.

How are the gaming companies getting on now?

In short; very well.

Activision Blizzard has released its 2020 first quarter results, and while the figures might be down on the same period of 2019, outlook is considerably better than the forecasts provided by the company on February 6.

Total revenues for the three months ending March 31 were $1.79 billion, down 2.1% year-on-year, but 9% up on the guidance which was offered to investors in February. This guidance was offered before the full impact of COVID-19 was comprehendible, so it understandable that estimates were off.

The Call of Duty title has been credited with much of the success, most notably the mobile game which was launched in late-2019 and the Warzone addition. Warzone was launched under a free-to-play business model, with in-game purchases, and has attracted more than 60 million users.

Elsewhere, Electronic Arts has also released financial statements for the period ending March 31. Total revenues for the three months increased 14.4%, 3% higher than what was forecast in January while net income was up 5% on the guidance offered. Digital revenues now account for 78% of the total, a transformation which has been taking place over the last few years.

FIFA 20 and Madden NFL 20 both excelled for Electronics Art in the sports gaming segment, with the latter recording the “highest engagement levels in franchise history”, while Apex Legends was the most downloaded free-to-play game on the PlayStation platform in 2019 and continued to excel through 2020.

These are only two examples of gaming companies who have benefitted from societal lockdown protocols, but there are numerous others including Microsoft with Xbox and its cloud gaming platform Project xCloud.

In short, more people are locked in doors and need entertaining. More are turning to gaming.

Telco data backs up the financials

With more people staying at home, there was a risk strain would be placed on broadband networks as these are assets which have not been deployed with the current societal lockdown in mind.

Video conferencing is on the up, content streaming is skyrocketing, and gaming is entertaining adults and children alike. All of these elements add up to pressure on the network, though many are performing admirably.

In March, Telecom Italia Luigi Gubitosi suggested network traffic had increased by as much as 70% in some regions, with Call of Duty and Fortnite usage some of the more prominent contributors. Performance of the networks were a worry, but these fears have now been addressed.

Who should we be keeping an eye on?

There are a lot of companies who will be releasing financial statements over the next week, all of which will be inclusive of at least some of the lockdown period.

  • 7 May: Nintendo
  • 13 May: Tencent
  • 13 May: Nexon
  • 13 May: Sony
  • 14 May: Ubisoft

Due to the number of private companies and start-ups in this segment, it is difficult to gain full visibility into the financial gains, but usage reports and download statistics can help. Ultimately, it is a fair assumption this is a segment of the technology industry which is benefitting from the on-going COVID-19 pandemic.

The financial risks have been predicted

In October 2019, the International Monetary Fund (IMF) held a press conference during which the risk of indebtedness was discussed in detail.

“In the event of a material economic slowdown, the prospects would be sobering,” said Tobias Adrian, Director of the Monetary and Capital Markets Department of the IMF.

“Debt owed by firms unable to cover interest payments with earnings, which we refer to as corporate debt at risk, could rise to $19 trillion in a scenario that is just half as severe as the global financial crisis.”

$19 trillion would account for 40% of the total corporate debt in the worlds’ eight largest economies. Of course, much of this rhetoric refers to traditional organisations and those who are already in precarious situations, but it does demonstrate risk.

Adrian stated six months ago that there was a corporate debt bubble building. The accessibility of borrowing facilities over the last decade, as well as tendency to stretch asset valuations, has led to a tsunami of debt. External debt has risen to 160% of exports according to Adrian, compared to 100% in 2008.

This does not necessarily directly correlate to the online gaming sector, but it is good to place the current situation into context. Last October, the IMF warned of a corporate debt bubble which would burst during a recession, compounding the misery and extending the financial downturn. This is the reality which the world is facing today.

Could be a short, but sharp downturn

Coutts bank has recently suggested the financial downturn would be a recession, but the depth would not extend to a depression.

“The current recession will without doubt be very deep and widespread,” the company said in a blog post. “Unemployment has risen significantly, and a wide range of sectors are affected.

“But we think the recession will be short-lived, and that’s the key to our cautious optimism. With economic activity plunging so deeply, even a slow, partial re-opening of the economy is likely to lift activity from these extreme lows.”

Although financial data demonstrated the downturn has been dramatic, there are few deep-seated systemic problems standing in the way of a recovery. The economy will not bounce back overnight, but recovery should be swift assuming there is not a secondary wave of infections.

This is the big question which many companies will be facing; how long will the recession last?

There will be an inflection point on the horizon

Companies who are benefiting from the societal lockdown will have to be wary of the inflection point in fortunes.

People being locked indoors is fine for a while, but soon enough it will start having a very material impact on the economy. When this happens, unemployment could rise, and consumer spending habits are altered. Discretionary income could disappear, and belts would be tightened as a result.

In this scenario, money spend on online gaming habits would almost certainly be cut back, turning the fortunes into flounders.

What is worth noting is this is based on assumption. The online gaming segments were nowhere near as prominent as they are today. In 2008, online gaming was a niche, it was pre-4G hitting mainstream markets while few console games had the internet appeal they do today. eSports would have been considered an absurd idea.

We cannot explicitly state what would happen to the gaming industry during a recession, as there is no precedent, but it is a safe assumption that it would not do very well.

What could happen?

Speculation is always a good bit of fun and should the gaming industry head towards uncomfortable times there certainly could be a dramatic amount of disruption.

There are of course multinational corporations who have profited from the shift to online gaming, but there are numerous start-ups who have shot to fame on the back of a viral hit. The likes of Angry Birds catapulted Rovio to fortunes, while Imangi Studios has experienced sustained success from less complex games such as Tempe Run.

Outside these blockbuster hits, there are thousands of developers who have profited handsomely from online gaming, ensuring the ecosystem is incredibly wide and diverse. Many of these companies are still private, spurred on by revenues flowing through the app economy. Should a recession halt this flow of cash, these companies would suffer.

Industry consolidation could be a reality, with multi-nationals snapping-up cut-price opportunities. Tencent is one company which has grown via acquisition, taking up stakes in the likes of Riot Games, Supercell, Activision Blizzard, Glu Mobile and Grinding Gears Games. Organisations like this must be licking their lips with a prospect of a recession; an opportunity to grow a digital empire through the acquisition of distressed assets.

Venture Capitalists will also have an eye on this area, though this would allow the start-ups to maintain some level of independence. They may have to hand over stakes at depreciated valuations to do so, however.

Interestingly enough, a recession could also present a significant opportunity for the ad-supported, free games. Online advertising demand might decrease, but it certainly wouldn’t disappear entirely. And consumers will still have to be entertained. This could supercharge a segment which is often overlooked in favour of more attractive cousins in the online gaming ecosystem.

Just enough but not too much

The fortunes of the online gaming industry are hanging in the balance somewhat. Yes, societal lockdown is benefiting this segment right now, but recovery will need to come before the inflection point.

The longer this lockdown persists, the greater the risk of a longer-term recession and a downturn for the online gaming segment. Just enough lockdown is a profit machine, too long could mean a very detrimental net loss.

Facebook launches gaming app to take on Twitch

Facebook has launched its own gaming app to tap into the fortunes currently being claimed by the likes of Amazon’s Twitch, Microsoft’s Mixer and Google’s YouTube.

While it might seem like a foreign concept to the vast majority of those who are above the age of 30, streaming gaming content is fast becoming big business. Whether it is following organised competitions or individual gamers, millions of Generation Z members are logging onto the content streaming platforms. This is a major advertising opportunity for any company which can build a substantial userbase.

“Investing in gaming in general has become a priority for us because we see gaming as a form of entertainment that really connects people,” Fidji Simo, who leads activities for the gaming app, said in an interview to the New York Times.

“It’s entertainment that’s not just a form of passive consumption but entertainment that is interactive and brings people together.”

The original plan was to launch the app in the summer, though the dramatic increase in gaming during the coronavirus outbreak encouraged the team to bring the debut forward. Facebook Gaming is now available to download in the Google Play store, while the team is still waiting for approval from Apple and the App Store.

Similar to the aforementioned apps from internet rivals, the app will act as an aggregator of content such as commentary on gaming videos, tips and tricks, highlights or live streaming of organised competition and all other forms of user-generated content. This gaming voyeurism might sound unusual, but if you have a look at the numbers Twitch boast, there is a major advertising opportunity; this is the Walled Garden business model which made Facebook a financial heavyweight in another setting.

Founded in 2011 as a spin-off of the general-interest streaming platform, the business was acquired by Amazon in August 2014 for an eye-watering $970 million. This might seem like a huge investment, but the same was said about Google spending $1.65 billion on YouTube in 2006.

Over the last nine years, Twitch has grown substantially:

  • Four million unique content creators stream on the platform each month
  • There are 15 million daily active users on average
  • More than 600 billion minutes of content were streamed through the platform over the course of 2019

While the platform was originally developed for gamers, Amazon has also built a bridge between this platform and the Amazon Prime entertainment product. Watch Parties on Twitch allows content creators to build new content on top of the existing content in the Amazon Prime library, layering commentary over TV shows or movies. Although still in the testing stages, eventually the content creators will be able to do this live, potentially taking Amazon further into the sports world.

With these sorts of numbers, and potential to diversify the service into new fields, this is the foundations of the Walled Garden business model.

This is a simple model in theory but a complicated one to get right in practise, as demonstrable by the number of companies who have failed. First, a company needs to create a free platform for users which is engaging. Secondly, the platform owner charges third-parties access to this audience through advertising services. The platform owner theoretically remains in control of the data, meaning advertisers have to come back month-on-month, creating recurring revenue streams.

Facebook was the first to take this idea to mainstream and generate billions in profit from it, and while others have tried, success has been incredibly varied. Google, for instance, has achieved this dream-scenario with YouTube, but has failed numerous times to create its own social media platform. Twitter sits somewhere in the middle, as it has cultivated an excellent platform and userbase, but has often struggled to monetize.

The gaming world presents a new opportunity, as can be seen from the Twitch numbers, but this is perhaps only the tip of the iceberg.

Although the gaming segments have been growing healthily over the last few years, the COVID-19 outbreak has acted as an accelerator. Without school to distract children or pubs to lure adults, there is much more free time in the household; some of this has been directed towards gaming.

According to Newzoo, revenues in the global gaming industry have grown from $138.7 billion in 2018 to $152.1 billion in 2019, with the team forecasting this growth to continue through to $196 billion in 2022. The benefits from the coronavirus might only be temporary, though this is a segment which is growing rapidly regardless.